Question

The 2016 and 2017 financial statements of Ken’s Sportswear follow: Balance Sheet 2017 2016 Assets Cash $9,000 $7,000 Accounts receivable 12,000 9,000 Inventory 18,000 15,000 Property, plant, and equipment 60,000 50,000 Total assets $99,000 $81,000 Liabilities and Shareholders’ Equity Accounts payable $16,500 $12,000 Notes payable 46,000 40,000 Common stock 25,000 25,000 Retained earnings 11,500 4,000 Total liabilities and equity $99,000 $81,000 Income Statement Sales (all on credit) $72,000 Less: Cost of goods sold 30,000 Gross profit $42,000 Operating expenses 12,000 Net income from operations $30,000 Interest expense 5,000 Net income before taxes $25,000 Income tax expense 8,500 Net income $16,500 Dividends $9,000 Per-share market price $36 $30 Outstanding common shares 2,000 2,000

(a) Compute all relevant ratios for 2017. (Round return on equity, return on assets, return on sales and dividend yield to 3 decimal places, e.g. 1.246. Round earnings per share, interest coverage, current ratio, quick ratio, receivable turnover, inventory turnover, debt/equity ratio, price/earnings ratio and return on investments to 2 decimal places, e. g. 1.25.) Return on Equity Return on Assets Earnings per Share $ Return on Sales Interest Coverage Current Ratio Quick Ratio Receivables Turnover Inventory Turnover Debt/Equity Price/Earnings Ratio Dividend Yield Return on Investment

Answer 1

1. Return on Equity

Return on Equity = Net Income / Average stockholders' equity * 100

Average stockholders' equity = ($25,000 + $4,000) + ($25,000 + $11,500) / 2 = $32,750

Return on Equity = $16,500 / $32,750 * 100 = 50.382%

2. Return on assets

Return on Assets = Net Income / Average total assets * 100

Average total assets = ($81,000 + $99,000) / 2 = $90,000

Return on Assets = $16,500 / $90,000 * 100 = 18.333%

3. Earnings per share

Earnings per share = Net Income / Number of common shares

Earnings per share = $16,500 / 2,000 common shares = $8.25 per share

4. Return on sales

Return on sales = Net Income from operations / Sales * 100

Return on sales = $30,000 / $72,000 * 100 = 41.667%

5. Interest Coverage

Interest coverage = Net Income from operation / Interest expense

Interest coverage = $30,000 / $5,000 = 6.00 times

6. Current ratio

Current ratio = Current Assets / Current Liabilities

Current ratio = ($9,000 + $12,000 + $18,000) / $16,500 = 2.36 : 1

7. Quick ratio

Quick ratio = (Cash + Accounts receivable) / Current Liabilities

Quick ratio = ($9,000 + $12,000) / $16,500 = 1.27 : 1

8. Receivable Turnover

Receivable turnover = Net Sales / Average accounts receivable

Average accounts receivable = ($9,000 + $12,000) / 2 = $10,500

Receivable turnover = $72,000 / $10,500 = 6.86 times

9. Inventory Turnover

Inventory Turnover = Cost of goods sold / Average Inventories

Average Inventories = ($15,000 + $18,000) / 2 = $16,500

Inventory Turnover = $30,000 / $16,500 = 1.82 times

10. Debt / Equity ratio

Debt / Equity ratio = Total Liabilities / Total Equity

Debt / Equity ratio = ($16,500 + $46,000) / ($25,000 + $11,500) = 1.71 times

11. Price / Earnings ratio

Price / Earnings ratio = Market price per share / Earnings per share

Price / Earnings ratio = $36 / $8.25 = 4.36 times

12. Dividend Yield

Dividend Yield = Dividend per share / Market price per share * 100

Dividend per share = $9,000 / 2,000 shares = $4.50 per share

Dividend Yield = $4.50 / $36 * 100 = 12.500%

13. Return on Investment

Return on Investment = Net Income from operation / Average total assets * 100

Average total assets = ($81,000 + $99,000) / 2 = $90,000

Return on Investment = $30,000 / $90,000 * 100 = 33.33%

All the best...